Money may or may not be “the root of all evil” but it is the root of FS and the economy – both of which are problematic. The nature of current money is absolutely part of this equation.

In this special episode we review what money was, what it is now (created by private organisations as debt), the problems that leads to (esp asset price inflation, pyramids of debt, widening inequality, and exacerbated economic cycles) and central bank digital cash – what it is and whether it can help.

A recent Bank of England publication stated that the nature of money is widely misunderstood including in one respect in university textbooks (!). Couple this with a recent survey showing that only 1 in 10 MPs understand where money comes from and it’s no wonder we are adrift. A slogan in the recent general election was “there are no magic money trees” but in fact there are.

Positive Money are “a movement for a money and banking system that works for society and not against it.” Positive Money’s founder Ben Dyson is now Economic Research Lead, Digital Currencies at Bank of England which I think tells you that these guys are thinking along the right lines.

I’m delighted to be joined today by David Clarke Positive Money’s expert on central bank digital currencies.

Needless to say “money” is at the heart of FS and an understanding of money is at the heart of understanding FS. If the BoE identified common misconceptions there was an even bigger one at the start of the Fintech era that somehow the Fintechs could “beat the banks”. This was always nonsense for many reasons but the biggest of which is that if we say abolished banks overnight then we would also abolish 97% of all the money we own – money being mostly “bits in bank computers”.

We cover a huge territory on the show, principally as its in a sense more important to first understand the context to Central Bank Digital Cash than it is the as-yet-unworked-out details of how it might work.

With such misunderstanding amongst our great leaders is it a surprise that the economy keeps toppling over and FS crises have been pervasive in recent decades?

Our financial system is so unstable because the state first allowed it [the private banking sector] to create almost all the money in the economy and was then forced to insure it when performing that function. This is a giant hole at the heart of our market economies. It could be closed by separating the provision of money, rightly a function of the state, from the provision of finance, a function of the private sector.

the nature of money is at the root of many economic problems

the inbuilt contradiction between 97% of all money being created by banks who of course are focused on their own ends and own profits and the needs of the economy as a whole

a prime example that Lord Turner has pointed out is that the largest category of bank lending is against pre-existing property financing a bidding war between folks which just pushes the price of it up

the origins of money:

physical coins ~600BC

“cash” is from a Tamil word for Chinese money

the word money comes from the temple of Juno on one of the seven hills of ancient Rome

cheques were first used in Basra around 800/900AD

paper money and Marco Polo’s trip to China

anthropologists annoyance with economists who still state that money came from barter – for which zero evidence has been found in 200yrs of searching since Adam Smith stated it as his hypothesis

conversely money has been associated with militarism (the BoE was founded in 1694 in order to raise money for William IIIs war against France)

the origins of these systems in folks transferring credit balances on phone accounts

David’s career journey from politics at university to reforming the financial system – “we can’t build the fair and sustainable economy we need without fundamentally reforming the financial system”

the importance of the 1844 Bank Charter Act as a government attempt to stop private organisations creating their own money in pyramids of debt

the origins of this practice in commodity money, representative money and the corruption of that into BS money

how poor drafting led directly from there to 2008 – banks always found new ways to create more virtual money

banks are not “middlemen” collecting savings and passing it on to borrowers (one of the main misunderstandings the BoE’s paper points out)

rather banks create money by an accounting fiction. If you borrow £10 from your bank it writes in (formerly in its accounting ledgers, now in its computers) £10 on one side of the balance sheet and on the other side “you owe us £10”. By accounting trickery this is perfectly legal and amounts to creating money out of thin air. Note also that all money is thus created as debt (other than the 3% which is notes and cash (which is debt-free)

the problems that the contradiction between money being required for every economic activity but only a handful of private companies create it and they do so solely for their own ends…

this innovation could be used by the Bank of England to create Central Bank Digital Cash – this third type of money which is presently only available to banks could be expanded to be used by the people

this would also give the chance of future Quantitative Easing (QE) programs being “helicopter money” – ie increasing the wealth of all rather than the socially divisive current QE program where £1/2trn has gone to increase the wealth of banks and the rich at the expense of the poor being left even further behind

cf post-2008 Iceland bankrupting the banks and saving the people and the US saving the banks and bankrupting people

challenges around central bank digital cash

privacy – do you want the state knowing every transaction you ever do?

negative interest rates – the BoE is keen on being able to do this but in reality it becomes yet another tax on the people

the importance of “cash cash” continuing in parallel to mitigate the above issues